Gavel to Gavel: Oklahoma and the American Rule

Oklahoma made national headlines this spring when it “accidentally” abolished the American Rule — the rule that generally both parties to a lawsuit pay their own lawyers. This would have made Oklahoma the only loser-pays state in America, requiring the lawsuit’s loser to pay the winner for attorney fees.

The Legislature corrected the mistake, but it stirred discussion about tort reform. Some theorize that a loser-pays system would encourage caution about filing lawsuits they might lose — discouraging tort claims and lowering insurance premiums. Unfortunately, this theory does not have much empirical support.

The beneficiaries of loser-pays systems are people who have fewer resources than their opponents. The people bringing frivolous lawsuits don’t have anything to lose. The drug-seeker who fakes a fall in a restaurant bathroom, the serial workers’ comp claimant that has spent more time on disability than actually working, the junkie that sues a microwave manufacturer when it won’t cook her meth properly — these people can just declare bankruptcy if they lose. Meanwhile, the lawyers filing these frivolous lawsuits rarely suffer consequences for doing so, and they can rely on nuisance settlements to keep their practices afloat.

The same is not true for businesses. If a business has a small tort liability for a given claim, adding an attorney fee award on top can rapidly multiply the exposure. And unlike an ordinary person, businesses have assets to satisfy a judgment and fewer options for walking away from their creditors. That is why laws covering civil rights and consumer protection include loser-pays provisions to encourage, rather than discourage, lawsuits against businesses.

This phenomenon is best illustrated by property damage cases. Oklahoma has an unusual law imposing loser-pays for civil actions to recover damages for accidental or willful injury to property. This incentivizes plaintiff’s lawyers to take low-value cases that might not otherwise be economically feasible to bring. It also incentivizes early settlement; if a defendant mounts a vigorous defense but still loses, it increases the potential exposure for attorney fees in favor of the plaintiff. But there is no countervailing point in favor of businesses; the law looks fair, but is surprisingly one-sided.

Oklahoma has taken steps to become more business-friendly, and to curb the rising costs of litigation. But it is not clear that switching to a loser-pays system would serve those goals.